Transcripts released by the Federal Reserve reveal the central bank misinterpreted the downswing in the housing market as a positive signal of the market pricing in risk rather than the beginning of a bust that would quickly unravel the financial markets.

Top officials at the US Federal Reserve took months to realize the 2007 financial crisis would rock the world’s largest economy, according to an embarrassing set of meeting transcripts released on Friday.

The transcripts reveal that some Fed policy makers even viewed the crisis, which erupted in August 2007 on the back of problems in the market for subprime mortgage loans, as good news because markets were pricing in more risk.

Frederic Mishkin, featured prominently in the documentary Inside Job, was particularly bullish on the downturn in the housing market.

“The point of the subprime market is just that we now trust the credit-rating agencies less. Basically what I think is happening in a way is quite a good thing: We were concerned that the markets were a little too optimistic, that there was too much opacity, and that people weren’t worried about it,” Mr Mishkin said. “Now, in fact, they are worried about it, and I think that is fundamentally a healthy situation.”

Both Geithner, then President of the New York Fed, and Chairman Bernanke played down the severity of the problems in the market as well as dismissing the need for bailouts. Bernanke even said at one meeting “It’s a question of market functioning, not a question of bailing anyone out.”

If the Federal Reserve, designed for and by Wall Street, is so poor at catching these bubbles why is it so important that it be “independent” from democratic control?

Hindsight may be 20/20, but it’s time to put this discussion in the global context so that people truly get it drilled into their minds that this isn’t just about political party differences in the USA.

Here’s an article on what’s happening in Canada. It should sound familiar.
Excerpt is from the article:

“I mean, how many times have we seen this sort of thing before? Let’s see, there’s the US, the UK, Ireland, Spain, Japan, Australia, and now Canada. That’s a pretty impressive list of coincidences, isn’t it? And isn’t it funny how the exact same policies were put in place (low interest rates and lax lending standards), that produced the exact same results?

It’s almost like the folks at the central banks and government wanted to blow up the system from the very start. How else can you explain the fact that we’ve seen a rash of these monster bubbles across the industrial world which have ravaged their respective economies and led inevitably to the implementation of harsh austerity measures? Coincidence?

Not bloody likely. Easy-money bubblemaking is just part of a bigger plan to crush labor, eviscerate the safety net, and restructure the economy. There’s nothing random about it. Check out this clip from Dr. Housing Bubble:

“I was trying to find a time in history where the world experienced correlated housing bubbles and could not find a time similar to the one we are living in when it comes to real estate. The reason for this is central banking policy around the world is very similar…..

Part of it has to do with easy banking policies mimicking one another. If you think that all of this came at no cost just look at the balance sheet of big central banks….

Central banks have boosted their balance sheets from $2 trillion in 2008 to being on path to reaching $6 trillion this year. The Fed alone is inching closer to $3 trillion especially if they continue with QE3 and their mortgage backed security purchasing plan. It is very clear that the Fed became the bad bank to induce this housing boom and went as far as to take off MBS from the hands of these banks.” (“Global Housing Bubbles in Perspective”, Dr. Housing Bubble)

So they’re all doing the very same thing at the very same time, right? And they don’t care how much money they print, because the money never goes beyond their buddies at the banks and the brokerages. So there’s no threat of inflation. It all stays in the family.

And how do you like that part about “correlated housing bubbles”? Now there’s an understatement. The fact is, the world’s biggest central banks (The Fed, the ECB, the BOJ, the BOC and the BOE) are a de facto cartel…’

I think it was Minsky that described the cycle that capitalist economies go through. It is not a conspiracy so much as it is built in. The exuberance ultimately ends in a bubble. The only way we might control it is through good regulations and regulators. Both of which we don’t got. Dodd-Frank was an attempt but there is so much lobbyist money it will likely never get all the regs completed or completed in such a way they work. Then, of course, you gotta have regulators and what are the chances that will get funded? Best we had was prolly Glass-Segal but even that never dealt with these freaking derivatives.

Then of course you got the Fed, like Geeenscam, who never saw a bubble they didn’t like. So they just let the irrational exuberance go, just a little longer.

Buying MBS is just another way to buy the trash off the banks balance sheets. You should buy some bank stocks and join in the fun. Buying T bonds doesn’t do much. Short term bonds are nearly a perfect substitute for cash. In fact, why do we even bother issuing them? Is it to give a little interest to the rich dudes?

I knew as early as 2003 that we were having another housing bubble like the one that burst in 1991. The tip off was a banner on a Wells Fargo bank in Los Angeles advertising mortgage loans with only 1% (or maybe it was 2%) down. So how could the so-called experts be caught by surprise?

Thank God we were smart enough to put the very same people that created this problem, couldn’t see the problem, covered up the problem, bailed out this problem, and made the problem larger in charge of the Fed and Treasury!

Thank God we were able to successfully ignore the people that were warning about this problem in the early 00′s, and disparaged the people that had dealt with and fixed similar problems in the 80′s.

And this is the added layer to the cycle of crashes your reply does not account for – governments around the globe using the crashes to achieve the same means:

“How else can you explain the fact that we’ve seen a rash of these monster bubbles across the industrial world which have ravaged their respective economies and led inevitably to the implementation of harsh austerity measures?”